The private sector will seek a secure revenue stream to ensure repayment of debt (and hence lower interest rates) and profitability over time. Given the limited sources of revenues, and structure of financing, any reduction in revenues has a direct and significant impact on the ability of the project company to repay debt and on the return the shareholders will earn on their investment. Therefore, when structuring a project, the private sector will want to see a clearly defined revenue stream, limiting as much as possible the risk that calculations of revenues or tariffs will not achieve the levels anticipated.
"Fee" relates to a revenue stream originating from one offtaker/public entity. This structure provides the project company with simplified billing and collection, and assessment of credit risk.
"Tariffs" relates to a revenue stream sourced from consumers. A project company with a Tariffs revenue profile will face more complex billing, collection and credit risk due to the interfaces with consumers and the large number of offtakers. This complexity will complicate the due diligence process, requiring to assess demand profiles, collection rates, opportunities to improve billing and collection and assessment of late payments and the ability to sanction nonpayment and non-performing debts.
So, the construction and operation of a power generation facility that sells electricity to the local utility would be a Fee project. While a project company delivering water to consumers and collecting tariffs from them would be a Tariffs project.